Archive for the ‘FCPA Jurisprudence’ Category

The 193 Meanings of “Foreign Official”

Thursday, June 26th, 2014

By most measures, there are 193 countries in the world.

According to the 11th Circuit’s recent “foreign official” ruling (see here), the FCPA’s key “foreign official” element can have 193 different meanings.

As previously highlighted, the key language from the opinion is as follows.

“An ‘instrumentality’ [under the FCPA] is an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own. Certainly, what constitutes control and what constitutes a function the government treats as its own are fact-bound questions. It would be unwise and likely impossible to exhaustively answer them in the abstract. [...] [W]e do not purport to list all of the factors that might prove relevant to deciding whether an entity is an instrumentality of a foreign government. For today, we provide a list of some factors that may be relevant to deciding the issue.

To decide if the government ‘controls’ an entity, courts and juries should look to the foreign government’s formal designation of that entity; whether the government has a majority interest in the entity; the government’s ability to hire and fire the entity’s principals; the extent to which the entity’s profits, if any, go directly into the governmental fisc, and, by the same token, the extent to which the government funds the entity if it fails to break even; and the length of time these indicia have existed.

[...]

We then turn to the second element relevant to deciding if an entity is an instrumentality of a foreign government under the FCPA — deciding if the entity performs a function the government treats as its own. Courts and juries should examine whether the entity has a monopoly over the function it exists to carry out; whether the government subsidizes the costs associated with the entity providing services; whether the entity provides services to the public at large in the foreign country; and whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function.”

In sum, the key concepts according to the 11th Circuit in analyzing whether a seemingly commercial enterprise is in fact an “instrumentality” of a foreign government such that its employees are “foreign officials” are control and function.

Yet how is a business organization competing in good-faith in the global marketplace supposed to find answers to these concepts?

The 11th Circuit thinks it will be easy as the court stated:

“We think it will be relatively easy to decide what functions a government treats as its own in the present tense by resort to objective factors, like control, exclusivity, governmental authority to hire and fire, subsidization, and whether an entity finances are treated as part of the public fisc.  Both courts and businesses subject to the FCPA have readily at hand the tools to conduct that inquiry (especially because the statute contains a mechanism by which the Attorney General will render opinions on requests about what foreign entities constitute instrumentalities.”

However, is it really that easy?

I trouble to envision a general counsel or chief compliance officer of a company charged with approving expenditures of things of value in connection with a business purpose (and let’s face it, companies do this all the time in the global marketplace as to certain customers and prospective customers) ever finding answers to certain issues identified by the 11th Circuit as being relevant.

The 11th Circuit’s suggestion to the contrary is somewhat comical.  Does the 11th Circuit envision the following?

  • General Counsel / Chief Compliance Officer:  Pardon me Company A, can you tell me how your principals are hired and fired?
  • General Counsel / Chief Compliance Officer:  Excuse me Company B, but do your profits go directly into the government fisc?  A follow-up if I may – does the government subsidize your operations?  And if so, for how long?

As to the FCPA’s Opinion Procedure program, seemingly lost on the 11th Circuit is that it often takes months for a business organization to receive an answer from the DOJ.  For this reason, among others, the FCPA Opinion Procedure program has been routinely criticized.  As noted in the OECD’s 2010 review of FCPA enforcement:

“So far, the FCPA Opinion Procedure has been used very little by the private sector to obtain DOJ advice on prospective transactions. […] The non-governmental participants in the on-site meetings cited several reasons for the infrequent use of the Opinion Procedure. For instance, legal and private sector representatives felt that the Opinion Procedure is only useful in limited situations where the prospective fact situation is narrow and not going to change. They also find that the response time, which is 30 days after the request is complete, is too long in certain situations, such as entering joint ventures and mergers and acquisitions, where a company normally needs to make decisions relatively quickly. […] The most pervasive concern of the private sector representatives was that availing themselves of the Opinion Procedure could expose them to potential enforcement actions by the DOJ, as well as provide competitors with information about their prospective international business activities.”

Moreover, a significant irony of the 11th Circuit’s resort to foreign characterization and treatment of a seemingly commercial enterprise is that the DOJ itself has rejected this approach in issuing opinions under the FCPA Opinion Procedure program.

For instance in Release 94-01 the Requestor disclosed that its “foreign attorney has advised that under the nation’s law, the individual [at issue] would not be regarded as either a government employee or a public official.”  However, the DOJ stated that “the foreign attorney’s opinion is not dispositive” and the DOJ “considered the foreign individual to be a ‘foreign official’ under the FCPA.”

Even the 11th Circuit noted that it will be a “difficult task – involving divining subjective intentions of a foreign sovereign, parsing history, and interpreting significant amounts of foreign law – to decide what functions a foreign government considers core and traditional.”  Moreover, the 11th Circuit recognized ”there may be entities near the definitional line for ‘instrumentality’ that may raise a vagueness concern.”

Yet, the end-result of the 11th Circuit’s decision is that “foreign official” – a key element of the FCPA – may mean 193 different things.

Some may be thinking that this entire post has been wasted ink because the meaning of “foreign official” matters only to those intent on engaging bribery. Such a position is off-base as the meaning of “foreign official” matters for a number of reasons as will be explored in a future post.

Potpourri

Monday, June 23rd, 2014

Today’s post is short on written words, but long on content.

Recently, I had the pleasure to again visit with Thomas Fox for his Foreign Corrupt Practices Act Compliance and Ethics Report.  In this episode I discuss:

  • The 11th Circuit’s recent “foreign official” ruling (see here, here, here and here for prior posts).  Among the issues discussed are my involvement in the “foreign official” challenges, what was not at issue in the 11th Circuit appeal and what was at issue, and the court’s flawed reasoning.
  • My new book “The Foreign Corrupt Practices Act in a New Era”) (see here and here for prior posts).
  • My FCPA Institute – a unique two-day learning experience ideal for a diverse group of professionals seeking to elevate their FCPA knowledge and practical skills.  The inaugural FCPA Institute is July 16-17th in Milwaukee, WI.

During the past month, I also had the pleasure to conduct two webinars hosted by Hiperos (a leader in third party risk management).

The first webinar was titled “Understanding the Root Causes of FCPA Scrutiny and Enforcement” (see here to view the hour long event).  The webinar:

  • Highlights the fallacy that only “bad” and “unethical” companies are the subject of FCPA scrutiny and explores certain foreign business realities and conditions that often serve as the root causes of FCPA scrutiny and enforcement.
  • Discusses what 99% compliance means.
  • Uses the root causes of many FCPA enforcement actions to highlight how an essential component of FCPA compliance is understanding the boring, day-to-day aspects of a company’s business in foreign markets and targeting, through training and other compliance policies, the relatively low-level employees and others who engage in these day-to-day activities.

The second webinar was titled ““The Ripple Effect:  Understanding Financial and Business Consequences of FCPA Scrutiny and Enforcement” (see here to view the hour long event).  The webinar:

  • Highlights how settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall financial consequences that can result from FCPA scrutiny or enforcement in this new era.
  • Discusses the “three buckets” of FCPA financial exposure:  (1) pre-enforcement action professional fees and expenses; (2) enforcement action settlement amounts: and (3) post-enforcement action professional fees and expenses and highlights how bucket #1 is typically (in many cases 3, 5, 10 or higher times the settlement amount) the greatest financial hit to companies the subject of FCPA scrutiny or enforcement.
  • Explores other negative financial consequences that often result from FCPA scrutiny or enforcement such as market capitalization, cost of capital, M&A activity, lost or delayed business opportunities, and FCPA-related litigation.
  • Shifts the FCPA conversation from being a purely legal issue to its more proper designation as a general business issue that needs to be on the radar screen of business managers and highlights how the FCPA’s many ripples instruct that business managers should view the importance of FCPA compliance more holistically and not merely through the narrow lens of actual enforcement actions.

Thank you for reading FCPA Professor every day.

With today’s post, you have the opportunity to hear me discuss FCPA, FCPA enforcement, and FCPA compliance issues for 2 hours and 30 minutes … should you so choose.

11th Circuit “Foreign Official” Decision – Perspective Including As To The Court’s Flawed Reasoning

Thursday, June 12th, 2014

Previous posts here, here, and here have highlighted various aspects of the 11th Circuit’s recent “foreign official” decision in U.S. v. Esquenazi (the first time in FCPA history that an appellate court has directly addressed the enforcement theory that employees of alleged state-owned or state-controlled enterprises can be “foreign officials” under the FCPA).

This post contains additional perspectives and highlights the 11th Circuit’s flawed reasoning.  For purposes of this post, knowledge of the court’s opinion and the facts and circumstances underlying the case are presumed.  As previously disclosed, I served as a pro-bono expert to the defendants’ pro bono counsel in the 11th Circuit appeal and was previously engaged as an expert by defense counsel in prior “foreign official” challenges.

For starters, it is important to understand what was not at issue in the 11th Circuit appeal and what was at issue.

What was not at issue is whether the FCPA should be a comprehensive anti-bribery statute such as the U.K. Bribery Act.  Congress could have passed a comprehensive anti-bribery statute in 1977 – as well as when the FCPA was amended in 1988 and 1998 – and could still pass a comprehensive anti-bribery statute today if it chooses.  However, it is undisputed that Congress has not done so and the FCPA’s anti-bribery provisions are qualified in many ways, including as pertinent to the 11th Circuit appeal, through the category of recipients of the alleged improper payments.

What was not at issue was whether the 11th Circuit’s decision would have any practical effect on corporate compliance programs. The bulk of commentary regarding the 11th Circuit decision has been written by law firms writing for corporate audiences and I agree that the 11th Circuit decision has little practical impact on corporate compliance programs because risk-adverse business organizations were already structuring compliance policies and procedures to the DOJ and SEC’s enforcement theory that employees of SOEs were “foreign officials.”  Such corporate positions were not evidence of the validity of the enforcement agency position for the same reason that the trending corporate position of eliminating facilitation payments is not evidence that the FCPA’s express facilitation payment exception is invalid.

Rather what was at issue in the 11th Circuit appeal was the basic and fundamental principle of ensuring – when the government marshals its full resources against individuals and deprives the individuals of their liberty – that each element of the charge alleged is being applied consistent with Congressional intent in enacting the statute.  After all, the DOJ and SEC should only enforce a law that Congress passed.

Notwithstanding what was at issue in the 11th Circuit appeal, some have suggested:

“For those who challenged the government’s legal interpretation of the term “instrumentality,” they need to pick and choose better places to challenge the FCPA and the government’s enforcement  program.”

Given what was at issue in the 11th Circuit appeal, as well as the other “foreign official” challenges, you will not find me apologizing one iota for my involvement in these cases or my “foreign official” declaration that partly served as a basis for the challenges.

Moreover, notwithstanding the 11th Circuit decision, let’s not forget the ultimate outcome of the other enforcement actions in which “foreign official” was challenged.

  • A federal court judge granted, at the close of the DOJ’s case, John O’Shea’s motion for acquittal and found him not guilty of all substantive FCPA charges.  In this post, O’Shea’s lawyers opine that the “foreign official” issue played a role in the ultimate outcome of the case.
  • In the Carson “foreign official” challenge, “foreign official” issues moved to the jury instructions and the judge issued a pro-defendant jury instruction concerning “knowledge of status of foreign official” (see here for the prior post).  Soon thereafter, the DOJ offered – what can only be described as lenient plea deals – that the risk adverse defendants accepted and the DOJ never had to prove its case.
  • In the Lindsey Manufacturing enforcement action, the judge ultimately dismissed (see here) the case after finding numerous instances of prosecutorial misconduct.  Although the prosecutorial misconduct was seemingly unconnected to “foreign official” issues, post-trial motions concerning, among other things, “foreign official” issues were pending at the time of dismissal.

One final big-picture point before highlighting the 11th Circuit’s flawed reasoning.

In the minds of some, the “foreign official” issue has now been “resolved” and “settled.”  To this, I respond:  can anyone name another instance in which a key element of an important law is deemed “resolved” or “settled” because of one appellate court decision?

*****

The 11th Circuit recognized that the plain meaning of the word “instrumentality” in the FCPA only provides a partial answer as to its plain meaning and thus the court turned to “other tools to decide what instrumentality means in the FCPA.”

However, the court’s decision lacks any discussion of two statutes – one passed before the FCPA (the Foreign Sovereign Immunities Act) and one passed after the FCPA (Dodd- Frank, Section 1504) that explicitly contain the term instrumentality as well as SOE concepts.

It is a basic maxim of statutory construction that all terms in a statute are presumed to have distinct meaning and the 11th Circuit itself stated ”it is a cardinal rule of statutory construction that significance and effect shall, if possible, be accorded to every word.”

However, the 11th Circuit dodged the salient question – if instrumentality was viewed by Congress to encompass SOEs, then why do statutes passed before the FCPA, as well as after the FCPA, explicitly contain the term instrumentality as well as SOE concepts?

If Congress believed the term “instrumentality” to encompass SOEs without an express definition saying so, then both FSIA and Dodd-Frank contain redundant terms which itself violates a basic maxim of statutory construction that statutes are presumed not to contain redundant terms.  Indeed, where a particular element is explicitly set out in one statute, but it is not likewise set out in the statute at issue, courts presume that Congress did not intend to include that element in the statue at issue.

*****

The court also examined the “broader statutory context” of the term “instrumentality” and examined the FCPA’s 1998 amendments and legislative history related thereto relevant to “foreign official.”  However, the court’s decision lacks any discussion of the FCPA’s enacting legislative history relevant to “foreign official” and thus violates another maxim of statutory construction that enacting legislative history governs the meaning of a statutory term, not subsequent legislative history.

Here, the 11th Circuit recognized that it was skating on thin ice when it stated as follows.  ”Although we generally are wary of relying too much on later legislative developments to decide a prior Congress’ legislative intent, the circumstances in this case cause us less concern in this regard.”  Indeed, the court even cited a Supreme Court decision stating that “the views of a subsequent Congress form a hazardous basis for inferring the intent of an earlier one.”

Nevertheless, the court stated as follows.

“This is not an instance in which Congress merely discussed previously enacted legislation and possible changes to it.  Rather, Congress did make a change to the FCPA, and it did specifically to ensure that the FCPA fulfilled the promise the United States made to other nations when it joined the [OECD] Convention.  The FCPA after those amendments is a different law, and we may consider Congress’s intent in passing those amendments as strongly suggestive of the meaning of ‘instrumentality’ as it exists today.”

The 11th Circuit’s rationale for consulting post-enactment legislative history, but not enacting legislative history, is not persuasive.  Perhaps most important, the 1998 FCPA amendment to “foreign official” did not even concern the “department, agency, or instrumentality” prong of the “foreign official” definition.  Rather the 1998 amendment to “foreign official” merely added those associated with “public international organizations” to the definition of “foreign official.”

As detailed in my “foreign official” declaration, the salient points from the FCPA’s enacting legislative history are as follows.

  • During its multi-year investigation of foreign corporate payments that preceded enactment of the FCPA, Congress was aware of the existence of SOEs and that some of the questionable payments uncovered or disclosed may have involved such entities.
  • In certain of the competing bills introduced in Congress to address foreign corporate payments, the definition of “foreign government” expressly included SOEs. These bills were introduced in both the Senate and the House during both the 94th (1975-76) and 95th (1977-78) Congresses.
  • An American Bar Association committee informed the Chair of the House subcommittee holding hearings on these bills that the definition of “foreign government” in these bills, specifically the portion of the definition referring to “a corporation or other legal entity established or owned by, and subject to control by, a foreign government” was “somewhat ambiguous.” The American Bar Association committee suggested a “more precise definition of this aspect of the definition of ‘foreign government’ and proposed the following language: “a legal entity which a foreign government owns or controls as though an owner.
  • Despite being aware of SOEs, despite exhibiting a capability for drafting a definition that expressly included SOEs in other bills, and despite being provided a more precise way to describe SOEs, Congress chose not to include such definitions or concepts in S. 305, the bill that ultimately became the FCPA in December 1977.

The above points have never been disputed in any of the “foreign official” challenges.

Rather, the DOJ argued that because SOEs were discussed during the legislative debate, Congress must therefore have intended to include SOEs in the definition of the “instrumentality” even though there is no explicit reference in the thousands of pages of legislative history for this position.  The logic of the DOJ’s position would mean that Congress must have intended, despite the lack of explicit reference in the thousands of pages of legislative history, to include commercial bribery within the scope of the FCPA because there was much reference during the legislative history to commercial bribery payments.

In short, the 11th Circuit’s reasoning was flawed because in consulting legislative history the court consulted the wrong legislative history.  The correct legislative history, the enacting legislative history, says what it says and the salient points from my “foreign official” declaration have never been disputed.

****

The 11th Circuit’s reasoning is further flawed by the inference in the court’s opinion that the FCPA’s 1998 amendments fully conformed the FCPA to the OECD Convention and, because of this, the FCPA must include SOEs because the OECD Convention does.

This is plainly false.

For starters, and as detailed in my “foreign official” declaration, it is clear that Congress was informed and understood that the 1998 amendments would not fully conform the FCPA to the OECD Convention.  Rather, the OECD Convention was described as “closely modeling” the FCPA; being “very similar” to the FCPA; being “largely consistent” with the FCPA; and “closely tracking” the FCPA.

For this reason, the 11th Circuit’s statement that Congress amended the FCPA in 1998 to “implement[...] the Convention’s mandates” is false.

Indeed, this was previously recognized in U.S. v. Kay where both the trial court and appellate court rejected the DOJ’s position that the FCPA captured payments to secure an “improper advantage” because the OECD Convention captured such payments.

The trial court decision stated:

“The OECD Convention had asked Congress to criminalize payments made to foreign officials ‘‘ ‘in order to obtain or retain business or other improper advantage in the conduct of international business.’’ . . . Congress again declined to amend the ‘‘obtain or retain business’’ language in the FCPA . . . . Congress did not insert the ‘‘improper advantage’’ language into the ‘‘obtain or retain business’’ provision of the FCPA.”

Although the Fifth Circuit overruled the trial court’s decision granting the defendants’ motion to dismiss, the appellate court likewise stated as follows concerning the FCPA’s 1998 amendments:

“When Congress amended the language of the FCPA, however, rather than inserting ‘any improper advantage’ immediately following ‘obtaining or retaining business’ within the business nexus requirement (as does the Convention), it chose to add the ‘improper advantage’ provision to the original list of abuses of discretion in consideration for bribes that the statute proscribes.’’

Even thought the U.S. signed the OECD Convention, the Convention was not self-executing.  Rather the Convention encouraged parties to “take such measures as may be necessary to establish that it is a criminal offense under its law for any person intentionally to offer, promise or give any undue pecuniary or other advantage, whether directly or through intermediaries, to a foreign public official …”.

The notion that the FCPA changed in 1998, in the absence of specific implementing legislation as to specific elements, because of generic references to the OECD Convention is false and has previously been rejected by the Fifth Circuit.  In short, the OECD Convention was not self-executing and it is black letter law that if a treaty is not self executing it is not the treaty, but the implementing legislation, that is the law of the land.

Yet, the 11th Circuit suggested that because the ”only change to the definition of ‘foreign official’” in the 1998 amendments was to add “public international organizations,” that ”this seems to demonstrate that Congress considered its preexisting definition already to cover” employees of alleged SOEs.

For the reasons stated above in terms of the FCPA’s enacting legislative history, this suggestion is off-base and not supported by any explicit statement in the FCPA’s voluminous enacting legislative history.

The inference in the 11th Circuit’s decision is that the FCPA changed – presumably through a process of osmosis – because the U.S. signed the OECD Convention.  Taking the court’s rationale to its logical conclusion, does the FCPA no longer have an express facilitation payment exception because the Convention does not?  Does the FCPA no longer apply to payments made to political parties because the Convention does not?  Congress surely did not change through osmosis the scope and meaning of the FCPA on these issues despite its generic references to the Convention in the 1998 amendments.

*****

Throughout the “foreign official” challenges, the DOJ advanced the argument that a decision contrary its position (i.e. that employees of SOEs are not “foreign officials”) would result in the U.S. being out of compliance with its OECD Convention obligations.

This has been a red-herring argument all along.  Another another U.S. law, the Travel Act, which the DOJ has often used in connection with FCPA enforcement actions, can capture payments outside the context of “foreign officials” and is capable of capturing payments to SOE officials as contemplated by the OECD Convention.

Moreover, the DOJ’s position ignores the fact that courts in other OECD Convention countries have concluded that employees of alleged SOEs are not “foreign officials.”  (See here for a previous guest post regarding the issue in Korea).

Nevertheless, the 11th Circuit accepted the DOJ’s red herring argument and incorrectly concluded that it was “constrained to interpret ‘instrumentality’ under the FCPA so as to reach the types of officials the United States agreed to stop domestic interests from bribing when it ratified the OECD Convention.”  Elsewhere, the court stated that to interpret instrumentality to exclude SOEs “would put the United States out of compliance with its international obligations.”

Neither statement is true.

“Foreign Official” Roundup

Friday, May 23rd, 2014

A roundup of commentary regarding the 11th Circuit’s recent “foreign official” ruling.

In this Morrison Foerster alert, Charles Duross (who as recently as four months ago was the DOJ’s FCPA Unit Chief – see here) calls the FCPA a “complex statute” and states that “companies hoping for additional clarity through the creation of either a bright-line rule or a clearly defined test [as to "instrmentality"] will be disappointed …”.  Duross further states:

“Implications for Future FCPA Enforcement

As with the FCPA Resource Guide, many businesses were hoping that the Esquenazi decision would bring additional clarity to the question of “who is a foreign official” under the FCPA. But close observers were not surprised by the Eleventh Circuit’s decision, both because of the series of district court decisions across the country that had followed the same course before and because of the strong facts supporting the conclusion that Teleco was, indeed, an instrumentality of the Haitian government.

That said, the Esquenazi court repeatedly referenced Commentary 15 to the OECD Anti-Bribery Convention, which states that a public enterprise (i.e., an instrumentality) does not include an enterprise that “operates on a normal commercial basis in the relevant market, i.e., on a basis which is substantially equivalent to that of a private enterprise, without substantial subsidies or other privileges.”  This factor could be significant in countries like China, where there exist 144,000 state-owned enterprises, many of which may operate on a normal commercial basis without any support from the state. It remains to be seen whether the Esquenazi decision and its embracing of Commentary 15 will result in the DOJ and the SEC being more restrained in applying the “instrumentality” label to state-owned enterprises that otherwise look and operate like ordinary commercial enterprises.

Moreover, Esquenazi demonstrates that companies cannot rely on “public” or “private” labels to determine whether an entity is an instrumentality under the FCPA. On one hand, the court affirmed that the mere provision of a service by a government-owned entity is not sufficient to meet its new test. On the other hand, as was the case in Esquenazi, the provision of an ostensibly private or commercial service may be found to be a government function depending on the particularities of the local jurisdiction. In the face of this uncertainty, and with an appellate court adopting an expansive definition of instrumentality, companies should ensure that their compliance programs are structured to sufficiently evaluate whether the entities with which they are conducting business are under the control of a foreign government and performing a government function – even if that function is considered commercial in nature.”

Brian Whisler (Baker & McKenzie)

“While not surprising, the Eleventh Circuit’s decision reflects an attempt to instill objectivity into the analysis of the “foreign official” element of the FCPA, but seems to fall short of a desire for more predictability and consistency in this area of the law.  The analysis of who/what constitutes a ‘foreign official’ will continue to be largely informed by local perceptions, setting up a patchwork of legal hurdles when conducting business abroad.   Multinational companies are understandably concerned about the sweeping effect of the FCPA generally and I’m not sure this decision will be perceived as offering further clarity for purposes of defining “foreign officials” in a more uniform, predictable fashion.”

Jan Handzlik (Venable)

“It is remarkable that, 37 years after the passage of the Act, an appellate court had to cobble together definitions of several key terms to save FCPA convictions.  The 11th Circuit relied on such things as Black’s Law Dictionary, Webster’s and the OECD Convention on bribery of public officials to give meaning to some essential elements of the Act.  This resulted from Congress’ failure to define key elements of the offense with specificity, something that presumably would have put Messrs. Esquenazi and Rodriguez on notice of what constitutes an FCPA violation.  Even though their convictions and harsh prison sentences appear to be based on a substantial factual record, they deserved better.”

This Wilmer Hale publication states:

“The court went on to say that “it will be relatively easy to decide what functions a government treats as its own” by looking at objective factors, including “control, exclusivity, governmental authority to hire and fire, subsidization, and whether an entity’s finances are treated as part of the public fisc.” The court said that courts and businesses “have readily at hand the tools to conduct that inquiry.” In practice, this analysis may be more difficult than the court allows because information on these factors is not always publicly available or easy to discern.”

[...]

This decision provides a clear definition of the term “instrumentality,” within the context of the FCPA, and provides guidance on what factors to consider when deciding how to treat employees of entities that are partially owned by foreign governments. This case will make it more difficult for defendants to argue that the definition of “instrumentality” is an open question of law, and enforcement authorities are likely to treat the issue as settled, even in cases outside the Eleventh Circuit. From a compliance perspective, companies would therefore be wise to proceed under the assumption that the FCPA prohibits payments to government-owned and -controlled entities, even if those entities operate in a commercial arena. In practice, this has been the standard in compliance programs for some time given that the enforcement agencies have pressed this view for many years, even memorializing it in their 2012 Resource Guide to the US Foreign Corrupt Practices Act.

Whether or not the recipient of a payment is a “foreign official,” however, may be becoming less significant from a compliance perspective. The Department of Justice and Securities and Exchange Commission have pursued numerous cases involving commercial bribery with no connection to a government, under the Travel Act or the accounting provisions of the FCPA. Relatedly, the anti-bribery laws of many other countries, such as the UK Bribery Act, prohibit commercial bribery. Thus, the analysis inEsquenazi is a key pronouncement regarding an important statute that has historically had few judicial interpretations, but its practical significance may be limited, particularly for global companies seeking to maintain clear compliance standards across jurisdictions.

All that said, given the dominant role of the government in this case, the outcome certainly could be different in other contested cases, for example in cases where the government may own less than a majority stake, or the function of the entity may be more tangential to the government. Thus, the court’s fact-specific inquiry will be important in fully analyzing potential liability under the statute in cases to come.”

This Sidley & Austin update states:

“This decision is a significant victory for the DOJ. The interpretation of what is an “instrumentality” is the bedrock of many FCPA enforcement actions, and the Eleventh Circuit’s definition is broad enough to encompass a wide spectrum of entities with varying degrees of foreign government ownership and/or control. Unfortunately for business stakeholders, the current trend in the courts, as evidenced by the Esquenazi decision, is to approach the question of whether a state-owned enterprise is an instrumentality of the government ultimately as a question of fact. The Eleventh Circuit seems to be proposing a totality of circumstances test with no single dispositive factor. It remains to be seen whether the defendants will petition for a writ of certiorari to the Supreme Court, but a central question well-preserved in the courts below is whether the FCPA’s definition of a foreign official is unconstitutionally vague. It is likely that the defendants will seek further review of the Eleventh Circuit decision.

[...]

The Esquenazi decision is an important victory for law enforcement that will encourage the Department and the Securities and Exchange Commission in their continuing pursuit of potential FCPA violations. Arguably, the victory was not absolute since the panel refused to adopt a definition of “instrumentality” that would have categorically covered every state-controlled entity that merely provided any service. Nevertheless, the opinion supports the government’s long-held position that “instrumentality” should be read broadly, and makes clear that even those entities that do not have a formal designation as a state enterprise may also fall within the FCPA.”

This Willkie Farr memo states:

“The Eleventh Circuit’s decision largely vindicates U.S. enforcement authorities, who have long asserted that the term “instrumentality” can include state-controlled entities and that the term “foreign official” can likewise include employees of state-controlled entities. In light of the decision, companies should generally continue to take a broad view of these terms in their internal compliance programs. Given that the definitions rely on “fact-bound questions,” and given the relative amorphousness of the test created by the Eleventh Circuit, functionality concerns should generally weigh in favor of taking a conservative approach—at least until additional precedent or enforcement actions provide more guidance. Accordingly, payments or transfers provided to employees of state-controlled companies (including gifts, meals, travel, or entertainment) should continue to receive close scrutiny from company compliance personnel.

That said, the decision contains significant limitations on the scope of the terms. In particular, the Eleventh Circuit’s second requirement—that an entity perform a function that the government treats as its own—could very well exclude small non-monopolist companies in many instances. For example, in China, many small companies are owned partially or wholly by government entities; but they act just like private companies, they are not providing services to the public at large, and the public and government do not necessarily view these companies as performing government functions. In light of the Eleventh Circuit’s opinion, mere state ownership alone would not make them instrumentalities under the FCPA. Overall, the decision limits the scope of the terms “instrumentality” and “foreign official” and could prove to be very important in limiting the scope of many enforcement actions under the FCPA.”

This Law360 article from Denton attorneys states:

“The Eleventh Circuit’s holding provides important guidance on the scope of “instrumentality” and in turn “foreign official” under the FCPA. Some aspects of the ruling appropriately limit the types of entities that constitute government instrumentalities. For example, under the court’s definition, an entity is not automatically an instrumentality merely because it has some government ownership; it must also perform a function the government treats as its own.

This second element is somewhat subjective in nature, particularly insofar as it requires consideration of “whether the public and the government of [the] foreign country generally perceive the entity to be performing a governmental function.” The competing declarations of Haiti’s prime minister in connection with this case demonstrate that determining the perception of even one individual regarding an entity’s public or private nature can be difficult, let alone the perceptions of the entire “public” and “government.” Although the Eleventh Circuit’s opinion states that the court was “mindful of the needs of both corporations and the government for ex ante direction about what an instrumentality is,” its flexible factor definition leaves substantial room for ongoing debate about the meaning of “instrumentality” and “foreign official.”

The Eleventh Circuit’s rejection of the type of bright-line rule for which the defendants advocated means that businesses and practitioners will continue to struggle to understand precisely when the FCPA does and does not apply to dealings with employees and directors of state-owned entities. Even as to the specific circumstances of Haiti Teleco, the opinion does not go into a detailed discussion of how the factors apply and does not indicate whether certain factors are more significant than others in the analysis.

Thus, from a risk management perspective, while the illustrative factors listed in this decision should be considered (along with the factors enunciated by the U.S. District Court for the Central District of California in U.S. v. Carson and Lindsey Manufacturing),[1] the safest course will be to assume that the DOJ and SEC (as well as future courts) will take the position that employees of any entity that is majority-owned or controlled by a foreign government will be deemed “foreign officials” for purposes of the FCPA.

Taking a cautious approach to this issue is prudent not only from the standpoint of minimizing FCPA risk, but also in light of the fact that global businesses subject to the FCPA must also ensure compliance with a range of other potentially applicable laws that prohibit commercial bribery, such as the Travel Act (18 U.S.C. § 1952), the U.K. Bribery Act, and local anti-corruption laws. For purposes of such statutes, it does not matter whether the bribe recipient is or is not a “government official.”

[...]

While other circuits may apply an interpretation that differs from the one adopted by the Eleventh Circuit, the limited case law analyzing the FCPA makes the opinion in Esquenazi particularly significant. As these the types of cases continue to be litigated, expect to see other courts weigh in on the definition of “foreign official.”

This Cadwalader advisory states:

“The panel’s ruling represents a major victory for the Department of Justice, and puts to rest a major issue of contention in recent foreign corruption prosecutions of individuals, by affirming the position taken by the Department since the FCPA was enacted. It also provides a clear warning to companies that conduct business internationally to examine closely the level of government control and functions of the entities with which they deal, regardless of the entities’ official designation or formal ownership.”

This Haynes Boone release states:

“The Eleventh Circuit’s decision is consistent with the government’s more expansive and longstanding position of what entities are government “departments, agencies and instrumentalities thereof” and who is a foreign government official. The government’s view previously was laid out in detail in the FCPA Resource Guide issued jointly by the Securities and Exchange Commission and the Department of Justice in November 2012. Accordingly, the decision bolsters the government’s aggressive approach to FCPA enforcement and its expansive view of who may be a foreign government official.”

This Clifford Chance briefing states:

“The boundaries between public and private entities are often blurred, particularly in developing countries where corruption risks are the target of heightened Justice Department scrutiny. The Eleventh Circuit’s opinion in Esquenazi underscores the importance of conducting due diligence on a company’s business relationships in order to determine whether such contacts may be government-owned or -controlled.”

This Davis Polk memo states:

“In the end, the Esquenazi opinion does not alter the current landscape much, if at all. The Esquenazi opinion may even further embolden U.S. FCPA regulators, including DOJ and the SEC, now that they have the backing—for the first time—of an appellate court. Specifically, the court’s analysis largely adopts the government’s opinion and mirrors the government’s analysis reflected in the DOJ/SEC 2012 Resource Guide to the U.S. Foreign Corrupt Practices Act (“the Guide”), which states in relevant part that “[t]he term ‘instrumentality’ is broad and can include state-owned or state-controlled entities. Whether a particular entity constitutes an ‘instrumentality’ under the FCPA requires a fact-specific analysis of an entity’s ownership, control, status, and function.” The Guide then lists eleven non-exhaustive factors that courts have instructed juries to consider when determining instrumentality, which are reminiscent of the above-listed factors from the Esquenazi decision.”

This Arnold & Porter advisory states:

“As the first appellate court interpretation of what constitutes an “instrumentality” of a foreign government, the Eleventh Circuit’s opinion provides additional guidance to companies seeking to do business overseas without running afoul of  the FCPA’s anti-bribery provisions. Because the Court declined to adopt the limited, bright-line interpretations  of “instrumentality” urged by the defendants, companies should continue to appreciate that a broad range of  entities may be considered instrumentalities of a foreign government, and use the Eleventh Circuit’s illustrative  factors as guidance when constructing their anti-corruption compliance programs. Companies should assume that both  the government and the courts will do the same.”

This Norton Rose Fulbright

“The 11th Circuit decision was groundbreaking in that it represents the first time an appellate court defined “instrumentality” under the FCPA.  As a practical matter, however, US regulators have routinely taken an expansive view of who can properly be considered a “foreign official” through their broad view of which entities are “instrumentalities” under the FCPA.  As such, there will likely be little change in the US government’s approach.  Nevertheless, the judicial decision, of which there are still few in the FCPA arena, lends validity to the government’s broad interpretation of “foreign official” under the statutory prohibitions.

Consequently, caution should be exercised when interacting with entities which are subject to the control of a non-US government and engaged in business that the foreign government likely considers government business. Under Esquenazi, it should be presumed that employees or representatives of that entity are foreign officials.”

This Crowell Moring release states:

“In Esquenazi, the Eleventh Circuit blithely suggested that consideration of the “objective factors” it listed should make it “relatively easy” for U.S. companies doing business abroad to assess whether an entity is an “instrumentality” – particularly in light of the Advisory Opinion process. But even if a particular transaction could await an Advisory Opinion, any resulting Opinion would be expressly conditioned on the accuracy and completeness of the information provided. Those experienced in international business understand how difficult it remains to obtain reliable ownership and similar information in many foreign countries.

Companies will need to continue to be cautious in dealing with employees of any entities that have some level of foreign government control or ownership, and it remains to be seen whether the Eleventh Circuit’s “objective factors” will alleviate or only aggravate the confusion about which persons are “foreign officials” under the FCPA.”

This Mayer Brown update states:

“As the first appellate court to consider the reach of the term “instrumentality,” the Eleventh Circuit recognized that its opinion would provide much-needed guidance to “both corporations and the government.” Corporations operating in foreign jurisdictions should reexamine their compliance polices and business practices in light of the Esquenazi decision to ensure that they properly account for the broadened understanding of instrumentality under the FCPA.”

This Paul Hastings alert states:

“This decision is the first appellate court opinion to address challenges to the DOJ’s and SEC’s interpretation of “instrumentality” which in many ways have defined the reach of the FCPA. As such, this court’s definitive opinion would appear to curtail the on-going debate over what constitutes a government instrumentality and whether improper payments to state-owned entities could be a violation of the FCPA. Businesses have struggled over the extent to which they should treat employees of state-owned entities as public officials. While this decision provides some clarity as to the factors to consider, it is far from the bright line rule that businesses have been seeking in crafting their compliance programs and struggling with the challenges of operating in the international business environment. In this decision, the Eleventh Circuit provided additional factors beyond those proposed by the enforcement agencies and those that this trial court and other trial courts had used in examining the issues at the trial level. The Eleventh Circuit, however, found no need to elaborate on the application of those factors to the matter at issue, and therefore, this opinion provides little guidance to companies seeking certainty. Moreover, the court did not even discuss the relative weight of the factors, for example, whether majority ownership may be of greater importance than the formal designation of the entity. Rather, the court noted that it believed “Teleco would qualify as a Haitian instrumentality under almost any definition we could craft.”

The court thought it would be “easy to decide what functions a government treats as its own” based on objective factors like control, exclusivity, governmental authority to hire and fire, subsidization, and whether an entity’s finances are treated as part of the public’s finances. The court added its view that both courts and businesses “have readily at hand the tools to conduct that inquiry.” Businesses, however, have found that, not only is gathering that type of information both time consuming and expensive, but also it is often difficult to determine the level of actual control a government has over a facially commercial operation.

The court also avoided opining on the factors with greater specificity by noting that the FCPA “contains a mechanism by which the Attorney General can render opinions on requests about what foreign entities constitute instrumentalities.” Taking heed of this instruction, under appropriate circumstances, companies should consider using this FCPA Opinion Procedure to gain further guidance from the Department of Justice over what factors are most important in determining the status of a state-owned entity — a process that relatively few companies have taken advantage of during the decades of its existence. This decision, however, ultimately leaves the burden with companies to determine who exactly is a foreign public official by trying to discern ownership and control, often in jurisdictions that lack transparency and sufficient, objective sources of information.

[...]

In light of this appellate decision, enforcement agencies can be expected to view the legal wrangling over the definition of “instrumentality” as resolved. Companies can take little comfort in considering this an open area of law as courts may have little patience for further challenges to the definition of “instrumentality.” While future litigants may be able to tinker at the margins of the definition, the Esquenazi decision has made clear that the definition of “instrumentality” is broad enough that the FCPA prohibits bribes paid to certain state-owned entities. In the years to come, businesses will look for further guidance from the courts or through future DOJ Opinion Procedure releases on where exactly that line is drawn.”

This Morgan Lewis alert states:

“The Esquenazi decision is the first appellate court opinion to address challenges to the DOJ’s and SEC’s interpretation of “instrumentality.” Although the “control” and “function” analysis may not provide the bright-line guidance desired by businesses that operate in the global arena, the opinion confirms regulators’ warnings that improper payments to employees of state-owned and state-controlled entities can violate the FCPA.”

This Skadden memo states:

“The Eleventh Circuit’s decision is largely consistent with the broad view articulated by the DOJ and the SEC in the resource guide to the FCPA that they jointly published in 2012, supporting their continued focus on bringing FCPA cases involving the alleged bribery of employees of state-owned or state-controlled entities. Given the breadth of the DOJ’s and SEC’s view of state instrumentalities, and the continued operation of such entities in the commercial sector, the decision is a significant confirmation of entities and individuals caught within the FCPA.”

This Covington advisory states:

“The Eleventh Circuit’s decision contained no surprises and likely will have limited practical impact on how companies approach FCPA compliance. The four-prong standard developed by the court is broadly consistent with the views set forth by the several U.S. district courts that have considered similar questions, and by the U.S. Department of Justice and the Securities and Exchange Commission in their written guidance concerning the scope of the FCPA. A number of open questions remain concerning the FCPA “instrumentality” standard − the facts of the Esquenazi case presented a particularly strong case for a finding that the Haitian telecommunications entity in question was an “instrumentality” of the Haitian government, given the close control that the Haitian government seems to have had over the entity’s management. It remains unclear from the Esquenazi opinion, for instance, whether mere majority ownership by a government, absent more, is sufficient to trigger the FCPA anti-bribery provisions.

Nevertheless, companies are not likely during the normal course of business to undertake the case-by-case instrumentality analysis the Esquenazi court propounds, as the question whether an entity constitutes a government “instrumentality” is of decreasing relevance to corporate compliance programs, most of which clearly prohibit both commercial and government bribery. This case will likely have its greatest impact in a handful of criminal cases that come to the attention of the Department of Justice, in which companies and individuals invoke the decision to argue that a particular bribe recipient, employed by a government-owned company, should not be considered a “foreign official” under the FCPA.”

This Dechert update states:

“Although the Court noted that the entity at issue “would qualify as a Haitian instrumentality under almost any definition we could craft,” and although the Court has jurisdiction over only three states, this decision is likely to be influential because it is the first appellate decision to address this crucial definition. The decision likely means that companies will face even stronger headwinds than previously if they attempt to avoid prosecution based on an argument that the government body at issue did not perform “core” governmental functions. Notably, the Court set no bright-line rules, nor did it opine on which factor or factors may be most significant, but instead established a fact-based framework to be applied in each case’s particular circumstances.  The Court’s reliance on the guidelines set forth by the OECD could likewise lead future courts to look to the OECD’s guidance on other interpretive issues that arise under the FCPA.”

This Linklaters publication states:

“The Eleventh Circuit’s definition and factor-based approach permits a broad understanding of what constitutes a government instrumentality. Because it is the only appellate level guidance on this issue, the DOJ likely will maintain its expansive view of the FCPA’s anti-bribery provisions.

The exact reach of the FCPA’s anti-bribery provisions remains, however, a case-by-case determination; only time will tell exactly how the government and defendants will interpret the Eleventh Circuit’s definition, and how other courts will apply it. Indeed, because the test is fact-specific, it could lead to different results for different types of entities. For example, a public hospital or university owned and controlled by a foreign government may perform “a function the government considers its own,” while a sovereign wealth fund might or might not perform “a function the government considers its own.” And the test could lead to different results even for similar types of entities in different countries; for example, one country might consider its state-owned telecommunications company to carry out a governmental function, while another might consider its state- owned telecommunications company to carry out non-governmental functions. Indeed, the prosecution and defense in Esquenazi submitted conflicting evidence as to whether the government of Haiti considered the company at issue in that case to be performing a governmental function.

The Eleventh Circuit in Esquenazi adopted a broad definition of “instrumentality,” and clarified that the FCPA applies to bribes, not just of governmental officials themselves, but also of officials or employees of a broad range of state-owned enterprises, provided only that those entities carry out a function that the foreign government considers to be a governmental one. The breadth of the Eleventh Circuit’s definition of “instrumentality” reflects a broad understanding of the FCPA, and is unlikely to alter DOJ enforcement activities.”

This Weil Gotshal alert states:

“The court’s two-part test for a foreign government “instrumentality,” and the factors it considered in applying that test, should not result in any significant modification to the DOJ and SEC’s current FCPA enforcement program and are likely to be viewed  by those regulators as affirmation of their current interpretation of the FCPA. The factors articulated by the court are, in fact, very similar to those previously cited by the few district courts that have considered this issue as well as by DOJ and SEC in their 2012 Resource Guide to the U.S. Foreign Corrupt Practices Act.

The court’s two-part test makes clear that government ownership or investment is itself not enough to transform an entity into an “instrumentality” of that government. At the same time, the court’s test does not exclude the possibility that an entity could be an “instrumentality” of a foreign government even if  the government’s ownership interest represents only a  minority interest in that entity.

Perhaps more noteworthy, the court’s test validates reliance on factors that turn on the foreign  government’s “perception” of the entity’s role and  purpose. The role played by various entities in the public administration of a foreign state may often
be less discernable than other criteria such as state  ownership and management control. Each case will  therefore require specific analysis of various factors to  determine whether an entity is a foreign government  “instrumentality” under the FCPA.”

This Drinker Biddle article states:

“Less convincing was the court’s discussion of defendants’ contention that the rule of lenity required the court to “cabin” the definition of “instrumentality.” Addressing the argument in a footnote, the court observed that the rule of lenity applied only when there is a “grievous ambiguity” in the meaning of the statutory text. Id. at 11, n. 5. It is difficult to describe the ambiguity in this portion of the FCPA as anything but “grievous.” The term is not defined anywhere in the statute and, in order to search out the meaning of “instrumentality,” the Esquenazi court had to consult two dictionaries, see id. at 10-11; consider “the broader statutory context in which the word is used” (including amendments to the statute, and international treaty obligations undertaken by the U.S. to prohibit bribery), see id. at 13-18; and examine “the concept of a ‘usual’ or a ‘proper’ governmental function [that] changes over time and varies from nation to nation,” see id. at 19-20. The image of a dowser, divining rod in hand, comes to mind.

The Eleventh Circuit’s Esquenazi decision, like the Fifth Circuit’s decision in United States v. Kay, 513 F.3d 432 (5th Cir. 2007), is likely to have enduring influence over the construction of a key provision of the FCPA by lower courts throughout the country. And because the Eleventh Circuit adopted a “fact-bound” approach to defining instrumentality, rather than the strict construction argued by the defendants, companies and individuals doing business overseas will continue to grapple with the question of when their business counterparts abroad will be considered foreign officials under the FCPA. Until another Circuit Court, or the Supreme Court, addresses the question, prudent companies should treat any entity owned or controlled by a foreign government, even in part, as a foreign government agency or department for purposes of FCPA compliance.”

This Jones Day publication states:

“Esquenazi can be viewed as a significant victory for the government because it affirms the largest prison sentence ever handed down in an FCPA case, and it also affirms the Department of Justice and Securities and Exchange Commission’s broad position that the FCPA applies to improper payments made to state-owned commercial entities.  [...]  On the other hand, the decision may also place some limitations on the government’s broad reading of “instrumentality” because the court required proof that “that the entity perform[s] a function the government treats as its own.” Following this logic, state ownership, in and of itself, does not render an entity an “instrumentality” under the FCPA, which is not the position the government has taken in the past. This could potentially affect a variety of existing and future FCPA investigations.”

This Steptoe & Johnson alert states:

“The Esquenazicourt provided a definition of “instrumentality” and enunciated a set of factors to evaluate when applying that definition.  While such guidance is helpful, Esquenazi addressed a relatively clear-cut situation.  The decision leaves a number of relatively common – and not at all clear – situations up for debate.

How courts will treat in the future, and more importantly how companies and practitioners should treat now, the less-clear-cut instances where a government has negative control (e.g., golden shares or significant veto rights) over an enterprise or its governance, or a minority, non-controlling interest in an enterprise or its operations, or subsidiaries of such enterprises, necessarily will turn on the facts in question, and are not susceptible to simple or easy answers.  The Ezquenazi decision, by eschewing a bright-line test relating to the functions carried out by the entity, and focusing instead on issues such as host government ownership, control, and funding, requires a more searching analysis.  Where the facts are not clear, or are not readily available, or reflect fact patterns less compelling than those in Esquenazi, legal and compliance personnel may be well-advised to continue to adopt a conservative approach to the question of which entities qualify as an “instrumentality” of a foreign government for the purposes of the FCPA.”

An entire edition of the always informative Debevoise & Plimpton FCPA Update states:

“Although the opinion represents the first binding appellate court ruling on what constitutes an “instrumentality,”
the Esquenazi court’s definition leaves some questions unanswered and certainly leaves room for businesses and individuals to challenge FCPA prosecutions. The Court did not discuss the relative weight to be afforded the factors it advanced as  important in its decision that Teleco was  an instrumentality of Haiti’s government.  For example, is majority ownership or  control by the foreign government of  greater importance than some of the other factors; does it operate as a threshold for control status, as the FCPA Resource Guide suggests it typically should? Similarly, would a government official’s ownership of an otherwise private entity, or a government official’s membership on the board of directors of an otherwise private entity, without more, qualify the entity as an instrumentality if it performed a governmental function?

Outstanding questions like these might bolster calls for some kind of legislative effort to clarify what constitutes a “foreign official,” including clarification of what constitutes an “instrumentality” – for example, whether ownership by a foreign official can qualify an entity as an instrumentality, and if so, whether the foreign official must be of a certain rank or ownership must reach a certain percentage.

The Court’s interpretation of  “instrumentality” in light of the United States’ obligations under the OECD Convention also raises questions as to how courts might apply that theory in interpreting other parts of the FCPA. For example, should the facilitation payments exception in the FCPA be narrowly construed in light of its arguable conflict with the OECD Convention, which  recommends that such payments be treated  as unlawful? The DOJ and SEC FCPA Resource Guide takes a disapproving view of facilitation payments and cites to the OECD’s recommendation against them.  The Esquenazi “treaty obligation” analysis  could cause enforcement agencies to assert an even narrower interpretation of the exception – and potentially other parts of  the FCPA – in future cases.

Because the Eleventh Circuit panel  endorsed a fact-based approach similar to that enforcement agencies and prior  district courts have taken in recent years, the Court’s decision is unlikely to alter significantly compliance-related best practices.

The decision did not provide the type  of bright-line rule that businesses long have  sought in order to most effectively craft corporate compliance programs. Moreover,  the Court’s factors are sufficiently lacking  in detail and conceivably different enough  from the FCPA Resource Guide that, at  least until other courts of appeals or district  courts outside the Eleventh Circuit adopt  the Esquenazi opinion’s analysis, businesses  arguably now face a more complicated  task in trying to decide whether they are  dealing with an instrumentality of a foreign  government. Companies certainly should  review their compliance programs to ensure  they address the factors laid out by the  Esquenazi court.

The Court also made clear, in the event  it was not before, that companies bear the burden of researching foreign entities with  which they seek to conduct business.  The Court suggested that businesses “have  readily at hand the tools to conduct that  inquiry” and pointed specifically to the  DOJ’s FCPA Opinion Procedure.  That  procedure has well-documented limitations, though: the difficulty of obtaining an opinion that would remain reliable if the facts of a situation change in any potentially material way; the infeasibility of the 30- day timeline for opinions in fast-moving situations such as joint ventures and mergers and acquisitions; potential exposure of a company’s international business activities to competitors; and potential exposure of the opinion seeker to enforcement actions.

Similarly, the Court also suggested that “it will be relatively easy to decide what functions a government treats as its own … by resort to objective factors” like those advanced by the Court in deciding that Teleco was an “instrumentality” of Haiti’s government. As companies long have known, it can be expensive and time consuming to make such determinations, particularly in countries such as Russia, China, and various countries in Central and Latin America and in Africa where information about companies and state ownership is less than transparent and objective.”

From Dorsey Whitney’s Anti-Corruption Digest:

“While the opinion provides some clarity to firms doing business abroad as to whether it is transacting with an instrumentality of the government, and therefore a foreign official, it does not announce a bright line rule as many had hoped. In practice, the Court’s holding does little to assist businesses in evaluating their obligations and risks because it is difficult to gather information on many of these factors, including how much actual government control is exercised over an apparently private enterprise.”

This Hogan Lovells update states:

“Although the Eleventh Circuit’s decision does not break new ground in FCPA enforcement trends, it does represent a significant development in the legal rules governing that enforcement. To date, the DOJ’s and SEC’s enforcement practices have been rarely tested in court. The prosecutorial interpretations of the FCPA’s provisions have held sway in the many settlements and non-prosecution agreements entered into by the U.S. government and corporate defendants. Many companies and commentators have expressed hope for greater judicial clarification of the FCPA. The Eleventh Circuit’s decision provides such a clarification while simultaneously affirming the U.S. enforcement authorities’ broad understanding of the FCPA’s reach.”

This Wilson Sonsini alert states:

“[W]hile these factors [that the court articulated] are helpful in analyzing whether a particular entity may be an instrumentality, the court’s decision does not provide particularly useful guidance on how to apply these factors. Rather than provide a factor-by-factor analysis, the court stated, “Teleco would qualify as a Haitian instrumentality under almost any definition we could craft.”As such, the court did not address the relevant weight of each of these factors and noted that these factors were non-exhaustive.”

See also posts here and here from the FCPA Compliance and Ethics Blog and Corruption, Crime & Compliance.

“Foreign Official” – The Current Landscape

Tuesday, May 20th, 2014

Last week’s 11th Circuit “foreign official” decision (see here and here for prior posts) was the first decision of precedent (at least in federal courts in Florida, Georgia and Alabama) to address the enforcement theory that employees of alleged state-owned or state-controlled entities (“SOEs”) are “foreign officials” under the FCPA.

As readers likely know, last week’s 11th Circuit decision was preceded by two separate trial court decisions (both in the Central District of California in 2011) that also directly addressed the above enforcement theory.

In all of the cases, the issue of whether an alleged SOE was an “instrumentality” of a foreign government – and thus its employees  ”foreign officials” under the FCPA – was found to be a factual issue dependent on a number of non-exclusive factors.

The below chart highlights the current landscape as to the FCPA’s “foreign official” element relevant to “instrumentality.”

Esquenazi 

(11th Circuit – 2014)

Carson 

(C.D. Cal – 2011)

Lindsey Manuf.

(C.D. Cal – 2011)

“An ‘instrumentality’ [under the FCPA] is an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own. Certainly, what constitutes control and what constitutes a function the government treats as its own are fact-bound questions. It would be unwise and likely impossible to exhaustively answer them in the abstract. [...] [W]e do not purport to list all of the factors that might prove relevant to deciding whether an entity is an instrumentality of a foreign government. For today, we provide a list of some factors that may be relevant to deciding the issue.To decide if the government “controls” an entity, courts and juries should look to the foreign government’s formal designation of that entity; whether the government has a majority interest in the entity; the government’s ability to hire and fire the entity’s principals; the extent to which the entity’s profits, if any, go directly into the governmental fisc, and, by the same token, the extent to which the government funds the entity if it fails to break even; and the length of time these indicia have existed.[...]We then turn to the second element relevant to deciding if an entity is an instrumentality of a foreign government under the FCPA — deciding if the entity performs a function the government treats as its own. Courts and juries should examine whether the entity has a monopoly over the function it exists to carry out; whether the government subsidizes the costs associated with the entity providing services; whether the entity provides services to the public at large in the foreign country; and whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function.”

 

“[T]he question of whether state-owned companies qualify as instrumentalities under the FCPA is a question of fact.”“[S]everal factors bear on the question of whether a business entity constitutes a government instrumentality” including the following.• The foreign state’s characterization of the entity and its employees;• The foreign state’s degree of control over the entity;

• The purpose of the entity’s activities;

• The entity’s obligations and privileges under the foreign state’s law, including whether the entity exercises exclusive or controlling power to administer its designated functions;

• The circumstances surrounding the entity’s creation; and

• The foreign state’s extent of ownership of the entity, including the level of financial support by the state (e.g., subsidies, special tax treatment, and
loans).

[…]

“[The] factors are not exclusive, and no single factor is dispositive.”

[…]

[T]heir chief utility is simply to point out that several types of evidence are relevant when determining whether a state-owned company constitutes an ‘instrumentality’ under the FCPA – with state ownership being only one of several considerations.

[…]

“[A] mere monetary investment in a business entity by the government may not be sufficient to transform that entity into a governmental instrumentality. But when a monetary investment is combined with additional factors that objectively indicate the entity is being used as an instrument to carry out governmental objectives, that business would qualify as a governmental instrumentality.”

 

The court provided a”non-exclusive list” of “various characteristics of government agencies and departments” that fall within the description of instrumentality:• The entity provides a service to the citizens – indeed, in many cases to all the inhabitants – of the jurisdiction.• The key officers and directors of the entity are, or are appointed by, government officials.• The entity is financed, at least in large measure, through governmental appropriations or through revenues obtained as a result of government-mandated taxes, licenses, fees or royalties, such as entrance fees to a national park.

• The entity is vested with and exercises exclusive or controlling power to administer its designated functions.

The entity is widely perceived and understood to be performing official (i.e., governmental) functions]